What happened
Shares of southeast Asia's e-commerce giant Sea Limited (SE +5.24%) were down 4.1% today as of 1:20 p.m. ET. The high-growth, richly valued stock has now backtracked all the way to where it was this past spring -- which was another period of sharp sell-offs for Sea and other hypergrowth companies that (intentionally) don't generate a profit yet.
Sea is now up just 11% in 2021 after falling some 36% from all-time highs reached in October and November.
Image source: Getty Images.
So what
Inflation continues to rise at the fastest pace in decades, not just in the U.S. but all over the globe. The world is gradually reopening from the pandemic and lapping depressed economic indicators from a year ago. That paired with other issues like supply chain constraints is fueling the mid- to high-single-digit percentage inflation reports.
If inflation persists into 2022, higher long-term interest rates are a reality. Higher rates increase borrowing costs for companies, and also lower the value of future earnings potential for a business -- which in turn can reduce stock prices. Thus the big dip for Sea and many other growth stocks in the last month.
Now what
The good news, though, is that while inflation is shaping up to be a concern once again in 2022, hypergrowth companies like Sea are growing at a far faster rate and can outrun increasing costs. For example, revenue rose 122% year over year to $2.7 billion in Q3 2021, and Sea's rapid expansion looks poised to continue into the new year as it uses cash generated from its highly profitable gaming segment to expand its e-commerce platform into new markets.
Of course, many investors won't be comfortable owning Sea because the company intentionally operates at a steep net loss (although it did swing to free cash flow positive this year, which means it's no longer using up cash from its balance sheet). Nevertheless, for those who don't mind the wild swings in valuation inherent with stocks like Sea, now could be about time to start buying again after yet another tumble in recent weeks.
